Energy Update | January 30th, 2019

Energy Update
January 30^th, 2019

Natural Gas Prices Again Pullback to Long-Term Trendline.

After rallying two weeks ago based on the forecast of a possible Polar Vortex event near the end of January, prices again pulled back to the long-term trendline completing a classic buy the rumor sell the fact scenario:

Markets are forward looking and two weeks ago Natural Gas rallied in anticipation of a possible Polar Vortex event, which is taking place today with record low temperatures experienced in the upper Mid-west. But over the last week, the forecast for the first week in February is calling for much milder weather throughout most of the United States, and prices have pulled back in anticipation. The risk is similar to two weeks ago, prices may again follow a similar scenario, but in this case, it would be a sell the rumor buy the fact scenario when the mild weather actually arrives.

It is important not to focus on near-term weather events, which often are used by professional traders to accumulate long-term positions. Astute traders often take positions opposite to the hype of the day so they can accumulate positions at attractive prices. After building their positions they wait for future news events to justifying their position and use them as an opportunity to cover their positions.

The best way to avoid being deceived by near-term volatility is to remain focused on long-term fundaments. In my October 31^st Energy Report, I explained why the Natural Gas prices in the forward markets from Apr 2019 thru April 2022 below $3.00 per MMBtu were unsustainable. Exploration and Production Companies don’t generate profits below $3.00 per MMBtu; therefore, prices this low are a disincentive to production, and since demand is expected to continue increasing due to exports of Liquified Natural Gas overseas, increased pipelines to Mexico and electric power generation resulting in structural imbalances, the average price of Natural Gas will likely be higher in 2019 and beyond.

Natural Gas prices have been very volatile this winter, rally from $2.75 in September to near $5.00 per MMBtu in November, before returning to near $2.80 per MMBtu. But the good news is prices in the forward markets from April 2019 thru April 2022 remained very stable during this period trading from $2.70 to $2.80 per MMBtu and are excellent hedges.

I believe it is only a matter of time before prices in the forward markets increase based on fundamentals, and the volatility we are experiencing this winter is a harbinger of a new paradigm in which supply/demand imbalances will periodically result in explosive price increases similar to 2000 thru 2010. Prices during this period were also consistently in backwardation (prices in forward markers lower than near-term prices), and hedgers who secured long-term hedges avoided the high volatility caused by supply/demand imbalances, those who didn’t often secured hedges at the worst possible time.

Conclusions:

Natural Gas prices have been extremely volatile this winter, but forward market prices starting in April 2019 thru April 2022 remained stable with the average price trading from $2.70 to $2.80 per MMBtu.

But this stability will likely not continue, and I believe we are entering into a period similar to 2000 thru 2010 when prices were also consistently in backwardation and hedgers who secured long-term hedges avoided the high volatility caused by supply/demand imbalances, and those who didn’t often secured hedges at the worst possible time.

Not every client’s risk tolerance and hedging strategy is the same, but the above report will help you put into perspective the risk/reward opportunities. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Energy Professionals
Senior Commodity Analyst